Mid-year outlook for Canada - July 2017

The Canadian economy grew faster than expected in the first quarter of 2017. Real gross domestic product (real GDP) grew at an annualized rate of 3.7% for the first quarter of 2017. This follows strong GDP performance for the last two quarters of 2016; 4.2% in the third quarter and 2.7% in the fourth. The primary drivers of growth continue to be personal consumption, up 4.3%, and residential investment, up 15.7%. A welcome additional source of output growth has been the increase in business investment, growing at an annualized rate of 10.3% over the first quarter of 2017, its fastest growth rate in nearly five years. Business investment had previously been interrupted by the oil-price shock of 2014–2015, which almost completely stopped energy-sector capital expenditure in 2015–2016. The labour market has also been a source of optimism with employment having risen steadily over the past six months, beating expectations.

There remain two key areas of concern within the Canadian economy: the overheated housing sector and the high level of household debt that has fuelled it. In addition, the possible introduction of protectionist policies by the Trump administration looms in the background. Overall, the Canadian economy seems to have stabilized after the turbulence of the oil-price shock. With growth broadening across all sectors of the economy, the time appears to be right for a move to interest-rate normalization. In the case of an upside surprise in U.S. economic performance, Canada is well-placed to take advantage.

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